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Concerns over Setback in U.S.-China Trade Negotiations

#Key Business Issue l 2019-02-11

Business Watch

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It appears that trade negotiations between the U.S. and China have faced a setback. It had been speculated that U.S. President Donald Trump might hold a summit with his Chinese counterpart Xi Jinping after his second summit with North Korean leader Kim Jong-un in Vietnam later this month. But Trump says that he does not expect to meet Xi this month, casting doubt on the future of the 90-day trade truce between the two countries. 


Today, we’ll discuss the ongoing trade talks between the U.S. and China with Lee In-chul, director of the Real Good Economic Institute. 


The U.S. and China held high-level trade negotiations in Washington D.C. on January 30 and 31. The White House positively evaluated the talks, with Trump saying that the two countries made tremendous progress and they will reach a great deal. 


Meanwhile, China’s Vice Premier Liu He, who led the Chinese trade delegation, delivered Xi’s letter to Trump. In the letter, the Chinese President said that bilateral relations were at a critical stage and he hopes both sides will be able to meet each other halfway to reach a trade agreement before a March 1 deadline. 


Still, U.S. officials are saying that the two sides show widely differing views on China’s structural reform, including changes in its industrial policy. 


After the leaders of the U.S. and China agreed on a 90-day truce in their trade war at the end of last year, trade delegations of the two countries sat face to face late last month for a second time, following their vice-ministerial level trade meeting in Beijing in early January. The Beijing talks were considered to be a half success, with the two sides reaching at least a partial agreement. 


It is reported that the two countries also agreed on some parts during the latest round of talks, but it seems there are still differences to be hammered out. 


U.S. Trade Representative Robert Lighthizer, who led the American delegation, said that the two sides made substantial progress and focused on structural issues. But he added that a final agreement still remains unresolved. 


The U.S. demands that China reform its industrial and trade policies, including “Made in China 2025.” But China argues that it has continuously carried out policies of reform and openness and that it cannot accept Washington’s demand for a drastic change. Beijing is unlikely to modify its long-term policy that is closely related to its national interests just because the U.S. requests it to do so. 


During the two-day trade talks in Washington, China agreed to purchase a substantial amount of agricultural, energy and manufactured products and services from the U.S. to reduce a trade imbalance. The two sides also promised to strengthen cooperation on intellectual property protection and forced technology transfers. 


However, they still remain poles apart over the main point of contention. While the U.S. is focused on structural problems, China simply pledged to import more soybeans from the U.S. 


The U.S. demands that China abolish its industrial policy known as “Made in China 2025,” which aims to turn China into a technology manufacturing powerhouse by that year. But Beijing finds it difficult to yield to the U.S., as its industrial and technology policies have much to do with national competitiveness. 


To iron out the differences, China suggested that the two nations hold a summit late this month. But the summit is unlikely to take place anytime soon. 


In his State of the Union address, Trump said that he does not blame China for taking advantage of the U.S. and he has great respect for President Xi. But he also stressed that China’s theft of American jobs and wealth should come to an end. He reiterated his previous position that he would increase tariffs on Chinese imports unless the two countries strike a deal before the March 1 deadline. 


In Xi’s letter delivered to Trump, the Chinese President reportedly proposed a bilateral summit on the Chinese island of Hainan after the North Korea-U.S. summit in late February. It is uncertain whether and when the summit will be held, but trade officials of the U.S. and China will continue to engage in talks to finalize an agreement. U.S. negotiators are expected to participate in the next round of talks in China this week. 


After the recent high-level trade talks in Washington, media agencies predicted that the Trump-Xi summit would be held late this month, given China’s proposal for the summit and the second North Korea-U.S. summit scheduled to take place in Vietnam on February 27 and 28. But Trump said on February 7 that he does not expect to meet Xi before March 1st. 


That doesn’t necessarily mean that the trade negotiations between Beijing and Washington will falter. The two countries will continue to try to narrow their differences at future negotiations, including the one in Beijing this week. 


Now, the question is whether the U.S. will impose additional tariffs on Chinese goods after March 1st. 


The Trump administration has so far imposed tariffs from 10 percent to 25 percent on Chinese imports worth 250 billion dollars. In July and August last year, the U.S. placed 25 percent tariffs on 50 billion dollars of Chinese products. In September, it implemented new 10 percent tariffs on 200 billion dollars of Chinese goods. Initially, the U.S. planned to increase the rate to 25 percent on 200 billion dollars of Chinese imports from January this year and to levy additional tariffs on another 267 billion dollars of Chinese goods.   


In response, China retaliated with tariffs on 110 billion dollars of American products. Beijing is warning of tit-for-tat measures against Washington’s additional tariffs. But a full-blown tariff war, if realized, will only pose a political burden on both Trump and Xi. 


If the U.S. and China fail to reach a compromise during the trade truce period, U.S. tariffs on Chinese imports worth 200 billion dollars will increase to 25 percent from 10 percent. 


If that happens, the Chinese economy may slow down and possibly make Xi’s political base weaken. Trump, who hopes to win reelection in 2020, is also concerned about the negative effect of the protracted trade war with China on the U.S. economy. 


The global economy will also be hit hard by the trade war between the world’s two largest economies. The United Nations Conference on Trade and Development warns of currency wars and widespread trade protectionism if the trade dispute between the U.S. and China escalates. 


After all, it is up to Trump and Xi whether their countries conclude trade negotiations. An end to the trade war is good news not only for the U.S. and China but for the global economy as well 


There are calls to impeach President Trump over allegations that he colluded with Russia during the 2016 campaign. The longest government shutdown in American history is also bad news for Trump, who is seeking reelection. He may possibly attempt to find a breakthrough by using issues related to North Korea and China. 


Even if the U.S. strikes a big deal with China on trade, however, their hegemony battle will last. They could find a compromise in some way, but the trade conflict between the two powers can be defined as a war over global economic and technology supremacy, although it was ignited by a trade imbalance on the surface. So I don’t think there will be a dramatic solution to the trade dispute. 

                                                                   

Korea should prepare for the possibility of their prolonged hegemony war by reducing its economic dependence on the two countries and diversifying export destinations. 


It looks like there is still a long way to go before the U.S. and China completely end their trade war. As Mr. Lee pointed out, Korea needs to explore more export markets and change its economic structure of relying too heavily on foreign trade to better cope with the situation.

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